Attached files
file | filename |
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EX-32 - CONOLOG CORP | c62080_ex32.htm |
EX-31.1 - CONOLOG CORP | c62080_ex31-1.htm |
EX-31.2 - CONOLOG CORP | c62080_ex31-2.htm |
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SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
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FORM 10-Q/A |
AMENDMENT NO.1 |
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED April 30, 2010
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________________
Commission file number 0-8174
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Conolog Corporation |
(Exact name of registrant as specified in its charter) |
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Delaware |
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22-1847286 |
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(State or other jurisdiction of organization) |
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(I. R. S. Employer Identification No.) |
5 Columbia Road
Somerville, NJ 08876
(Address of principal executive offices and zip code)
Registrants telephone number, including area code: (908) 722-8081
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes o No x
The number of shares of common stock outstanding as of June 11, 2010 was 6,965,039.
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Conolog Corporation |
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Form 10-Q |
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April 30, 2010 |
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Explanatory Note |
The accompanying unaudited interim financial statements and notes thereto as of July 31, 2009 and April 30, 2010 and for the three and nine month periods ended April 30, 2010 and 2009, have not been reviewed in accordance with Statement of Auditing Standards No. 100 (SAS 100), as required by Rule 10-01(d) of Regulation S-X promulgated under the Securities Act of 1934. The Company intends to file an amendment to this Form 10-Q to file unaudited interim financial statements reviewed in accordance with SAS 100 as required by Rule 10-01(d) as promptly as practicable after it has resolved outstanding matters addressed in a comment letter it has received from the Division of Corporation Finance of the Securities and Exchange Commission (SEC).
Because the financial statements contained in this Form 10-Q do not meet the requirements of Rule 10-01 (d) of Regulation S-X, the Company may not be considered current in our filings under the Securities Exchange Act of 1934. Filing an amendment to this report, when the independent registered public accountants review is complete, would eliminate certain consequences of a deficient filing, but the Company may become ineligible to use Form S-3 to register securities until all required reports under the Securities Exchange Act of 1934 have been timely filed for the 12 months prior to the filing of the registration statement for those securities. The Company is evaluating the impact of filing a deficient Form 10-Q due to lack of a review by an independent registered public accounting firm on its covenants under its contractual commitments, its obligations under NASDAQ Stock Market listing standards, and the Securities Exchange Act.
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CONOLOG CORPORATION |
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Date: June 30, 2010 |
By /s/ Robert S. Benou |
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Robert S. Benou |
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Chairman, Chief Executive Officer, |
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(Principal Executive Officer) |
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Chief Financial Officer and Treasurer, |
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(Chief Accounting Officer) |
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2
INDEX
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PART I |
FINANCIAL INFORMATION |
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Item 1. |
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) |
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Contrary to the rules of the Securities and Exchange Commission, the Companys condensed consolidated financial statements included in this filing have not been reviewed by our independent public accountant in accordance with professional standards for conducting such reviews. |
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Condensed Consolidated Balance Sheets as of April 30, 2010 and July 31, 2009 |
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Condensed Consolidated Statements of Operations for the six and nine months ended April 30, 2010 and 2009 |
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Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2010 and 2009 |
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Notes to Condensed Consolidated Financial Statements |
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Item 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND FINANCIAL CONDITION |
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Item 3 |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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Item 4T. |
CONTROLS AND PROCEDURES |
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PART II |
OTHER INFORMATION |
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Item 1. |
LEGAL PROCEEDINGS |
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Item 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
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Item 3. |
DEFAULTS UPON SENIOR SECURITIES |
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Item 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
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Item 5. |
OTHER INFORMATION |
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Item 6. |
EXHIBITS |
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SIGNATURES AND CERTIFICATIONS |
3
CONOLOG CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
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April 30, 2010 |
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Restated
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
1,097,410 |
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$ |
27,358 |
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Accounts receivable, net of allowance |
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396,118 |
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245,980 |
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Prepaid expenses |
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15,896 |
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70,843 |
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Prepaid service agreements |
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435,651 |
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Current portion of note receivable |
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14,864 |
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Inventory |
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700,000 |
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425,920 |
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Other current assets |
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5,000 |
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5,000 |
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Total Current Assets |
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2,650,075 |
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789,965 |
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Property and equipment: |
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Net Property and Equipment |
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360,775 |
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396,704 |
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Other Assets: |
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Other non-current assets |
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262,234 |
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Non-current inventory |
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547,721 |
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425,000 |
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Deferred financing fees, net of amortization |
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51,507 |
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8,445 |
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Note receivable, net of current portion |
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83,103 |
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69,846 |
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Total Other Assets |
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944,565 |
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503,291 |
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TOTAL ASSETS |
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$ |
3,955,415 |
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$ |
1,689,960 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
181,682 |
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$ |
217,456 |
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Accrued expenses |
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47,334 |
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26,132 |
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Derivative Liability |
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20,847,678 |
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Current Convertible debenture, net of discount |
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34,318 |
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Total Current Liabilities |
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21,076,694 |
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277,906 |
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Non-Current Liabilities: |
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Convertible debenture, net of discount |
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$ |
355,634 |
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Total Liabilities |
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21,432,328 |
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277,906 |
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Stockholders Equity: |
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Preferred stock, par value $.50; Series A; 4% cumulative; 500,000 shares authorized; 155,000 shares issued and outstanding |
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77,500 |
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77,500 |
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Preferred stock, par value $.50; Series B; $.90 cumulative; 500,000 shares authorized; 1,197 shares issued and outstanding |
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597 |
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597 |
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Common stock, par value $0.01; 30,000,000 shares authorized; 6,965,680 and 1,842,485 shares issued and outstanding at April 30, 2010 and July 31, 2009 respectively |
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69,679 |
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18,425 |
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Contributed capital |
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61,471,520 |
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52,385,432 |
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Accumulated deficit |
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(78,964,475 |
) |
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(50,938,166 |
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Treasury shares at cost - 2 shares |
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(131,734 |
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(131,734 |
) |
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Total Stockholders Equity |
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(17,476,913 |
) |
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1,412,054 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
3,955,415 |
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$ |
1,689,960 |
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The accompanying notes are an integral part of the condensed consolidated financial statements
4
CONOLOG CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations (Unaudited)
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For the Three Months |
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For the Nine Months |
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2010 |
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2009 |
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2010 |
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2009 |
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OPERATING REVENUES |
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Product revenue |
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$ |
515,897 |
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$ |
293,920 |
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$ |
1,095,913 |
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1,239,560 |
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Cost of product revenue |
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Cost of goods sold |
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220,403 |
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78,159 |
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514,394 |
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312,522 |
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Total Cost of product revenue |
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220,403 |
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78,159 |
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514,394 |
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312,522 |
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Gross Profit (Loss) from Operations |
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295,494 |
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215,761 |
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581,519 |
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927,038 |
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Selling, general and administrative expenses |
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General and administrative (includes non-cash stock grants) |
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849,894 |
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1,152,063 |
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3,434,412 |
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2,285,610 |
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Total selling, general and administrative expenses |
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849,894 |
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1,152,063 |
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3,434,412 |
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2,285,610 |
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Loss Before Other Income (Expenses) |
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(554,400 |
) |
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(936,302 |
) |
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(2,852,893 |
) |
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(1,358,572 |
) |
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OTHER INCOME (EXPENSES) |
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Interest expense |
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(4,946,564 |
) |
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(6,289 |
) |
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(22,415,385 |
) |
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(75,563 |
) |
Interest income |
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1,244 |
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76 |
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2,661 |
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13,888 |
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Other Income |
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(320 |
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284,703 |
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354,947 |
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Change in Fair Market value of derivatives |
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13,965,643 |
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(2,102,682 |
) |
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Induced conversion cost |
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(142,071 |
) |
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(150,201 |
) |
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(347,982 |
) |
Amortization |
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(438,666 |
) |
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(36,155 |
) |
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(1,263,444 |
) |
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(373,703 |
) |
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Total Other Income (Expense) |
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8,581,657 |
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(184,759 |
) |
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(25,644,348 |
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(428,413 |
) |
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Income (Loss) before provision for income taxes |
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8,027,257 |
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(1,121,061 |
) |
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(28,497,241 |
) |
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(1,786,985 |
) |
Provision for income taxes |
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NET INCOME (LOSS) |
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$ |
8,027,257 |
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$ |
(1,121,061 |
) |
$ |
(28,497,241 |
) |
$ |
(1,786,985 |
) |
Preferred stock dividends |
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$ |
(1,045 |
) |
$ |
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$ |
(3,135 |
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$ |
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NET INCOME (LOSS) APPLICABLE TO COMMON SHARES |
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$ |
8,026,212 |
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$ |
(1,121,061 |
) |
$ |
(28,500,376 |
) |
$ |
(1,786,985 |
) |
NET INCOME (LOSS) PER COMMON SHARE |
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BASIC EARNINGS (LOSS) |
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$ |
1.22 |
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$ |
(1.19 |
) |
$ |
(7.24 |
) |
$ |
(2.46 |
) |
DILUTIVE EARNINGS (LOSS) |
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$ |
0.47 |
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$ |
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$ |
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$ |
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WEIGHTED AVERAGE COMMON SHARES |
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6,596,113 |
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939,688 |
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3,938,957 |
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|
727,420 |
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WEIGHTED AVERAGE COMMON SHARES |
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17,068,624 |
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The accompanying notes are an integral part of the condensed consolidated financial statements
5
CONOLOG CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement
of Cash Flows (Unaudited)
For the Nine Months Ended April
30, 2010 and 2009
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2010 |
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2009 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
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$ |
(28,497,241 |
) |
$ |
(1,786,985 |
) |
Adjustments to reconcile net loss to net cash used in operations: |
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Amortization and Depreciation |
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69,150 |
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|
8,000 |
|
Amortization of prepaid consulting expense |
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35,763 |
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11,921 |
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Stock based compensation |
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1,381,800 |
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|
378,876 |
|
Change in Fair Market value of derivatives |
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|
2,102,682 |
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Induced conversion cost |
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|
150,201 |
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|
347,982 |
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Amortization and interest discount on convertible debt and warrants |
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24,013,198 |
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112,399 |
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Stock issued interest |
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|
39,545 |
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Changes in assets and liabilities |
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(Increase) Decrease in accounts receivable |
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(150,176 |
) |
|
119,193 |
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(Increase) decrease in accounts receivable - other |
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16,592 |
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Decrease (increase) in prepaid expenses |
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(380,703 |
) |
|
(14,085 |
) |
(Increase) in inventories |
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(341,199 |
) |
Decease in other assets |
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Deferred financing fees |
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(43,062 |
) |
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261,304 |
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(Decrease) in accounts payable |
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(35,774 |
) |
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(64,043 |
) |
Increase in accrued expenses |
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21,202 |
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|
5,676 |
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Net cash used in operations |
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(1,293,415 |
) |
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(944,369 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchase of property and equipment |
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(33,220 |
) |
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Redemption of certificates of deposit |
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|
600,182 |
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Net cash used in investing activities |
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(33,220 |
) |
|
600,182 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from issuance of stock |
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1,000,000 |
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Proceeds from issuance of convertible debentures |
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1,000,000 |
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Proceeds from exercise of warrants |
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635,070 |
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Payments of financing fees related to convertible debentures |
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(240,000 |
) |
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Proceeds from note receivable |
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|
1,607 |
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|
10,649 |
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Net cash provided by financing activities |
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|
2,396,677 |
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|
10,649 |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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1,070,042 |
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(333,538 |
) |
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR |
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|
27,358 |
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|
680,647 |
|
|
|
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CASH AND CASH EQUIVALENTS - END OF YEAR |
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|
1,097,400 |
|
|
347,109 |
|
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|
|
|
|
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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CASH PAID DURING THE YEAR FOR: |
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Interest expense |
|
$ |
|
|
$ |
7,931 |
|
|
|
|
|
|
|
|
|
Income Taxes |
|
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|
|
|
|
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SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: |
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Debt converted to equity |
|
$ |
748,550 |
|
$ |
633,327 |
|
|
|
|
|
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|
|
|
Common stock issued for services to be provided |
|
$ |
506,200 |
|
$ |
|
|
|
|
|
|
|
|
|
|
Common stock (cancelled) issued for services to be provided |
|
$ |
|
|
$ |
(19,890 |
) |
|
|
|
|
|
|
|
|
Common stock (cancelled) issued for deferred compensation |
|
$ |
|
|
$ |
(561,210 |
) |
|
|
|
|
|
|
|
|
Common stock issued for accrued interest |
|
$ |
39,545 |
|
$ |
67,631 |
|
|
|
|
|
|
|
|
|
Common stock issued for deferred compensation |
|
|
1,381,800 |
|
$ |
1,345,465 |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements
6
FOR THE NINE MONTHS ENDED APRIL 30, 2010
(Unaudited)
Note 1 Unaudited Financial Statements
The condensed unaudited interim consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Companys annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the July 31, 2009 audited consolidated financial statements and the accompanying notes thereto.
These condensed unaudited
consolidated financial statements reflect all adjustments, including normal
recurring adjustments, which, in the opinion of management, are necessary to
present fairly the operations and cash flows for the period presented.
Results of
operations for the nine months ended April 30, 2010 should not necessarily be
taken as indicative of the results of operations that may be expected for the
fiscal year ending July 31, 2010.
The Company
has filed an 8-K, on March 22, 2010 regarding non-reliance for the 10-Q for the
period October 31, 2009.
Adjustments to
the October 31, 2010 10-Q relate to the accounting for derivative liability on
convertible debt and warrants.
All accounting
adjustments for these convertible debentures and warrants have been property
recorded for the nine month period ended April 30, 2010. .
Note 2 Conversion of Debt
On September 8, 2008, the Company reduced the exercise price of the warrants issued in connection with the Subscription Agreement, dated March 12, 2007 (the Subscription Agreement), from $1.20 per share to $0.50 per share. As a result of the reduction of the warrant exercise price, pursuant to Section 12 (b) of the Subscription Agreement, the conversion price of the Convertible Notes issued in connection with the Subscription Agreement is now $0.50 per share. Any shares in excess of the shares that already have been registered for sale on conversion of the Notes will not be registered under the Securities Act of 1933, as amended, and, therefore, may not be offered for sale, pledged or hypothecated in the absence of an effective registration statement or an opinion of counsel reasonably satisfactory to the Company that such registration is not required.
On March 9, 2009 the Maturity Date of the Convertible debt was extended from March 11, 2009 to August 31,2009. In addition, from the date of March 9, 2009 until immediately after the Maturity Date, the holders may convert at a conversion rate of 75% of the average closing bid prices for the five trading days preceding the date of the Conversion Notice.
As a result of the above reductions in exercise and conversion prices, for the three months ended October 31, 2009 investors have converted $37,950 of debt for 46,592 common stock shares. The Company has recognized an Induced Conversion cost related to these conversions of $31,208 for the three months ended October 31, 2009.
The Company entered into a Subscription Agreement (the Subscription Agreement), dated as of August 3, 2009 ( the Closing Date), with three investors, pursuant to which it sold an aggregate of One Million Dollars of its principal amount of secured promissory notes (the Notes). On the Closing Date the Company received gross proceeds of $500,000 and $500,000 (the Escrowed Funds) was placed in escrow pursuant to an Escrow Agreement between the Company, the Subscribers and the escrow agent. Pursuant to the Subscription Agreement, the Company was required to file a preliminary proxy statement with the Securities and Exchange Commission by September 2, 2009 seeking approval for the transactions contemplated by the Subscription Agreement and the Company was obtained approval of its shareholders on September 24, 2009.
At a special meeting of shareholders held on September 24, 2009, the shareholder approval was obtained. As a result, the escrow funds were released and after payment of fees in the amount of $50,000 to the placement agent for the transaction. (The company received net proceeds of $450,000 prior to the deduction of other fees and expenses related to the offering.)
7
The amount of the note was increased to $500,000. The initial interest rate of the Notes is 4% per annum and upon the shareholder Approval the interest rate became 8% per annum. Interest accrues from the date of the Closing Date and is be payable quarterly, in arrears, commencing six months after the Closing Date and on the maturity date of the Note. The Conversion Price of the Notes is $.78 (the Fixed Conversion Price) as may be adjusted (the Initial Conversion Price). Commencing six months after the Closing Date, the Conversion Price shall be the Fixed Conversion Price or 75% of the lowest three closing bid prices for the Companys common stock for the ten days prior to when the Note is converted.
The Company also issued the Subscribers Class A Warrants to purchase 1,282,051 shares of the Companys Common Stock at $1.12 per share. The Class A warrants are exercisable for a period beginning on August 3, 2009 and terminate on August 3, 2014. Pursuant to the Subscription Agreement, the Company also issued the Subscribers a total of 40,000 class B Warrants.
The Class B Warrants entitle the Subscribers after September 24, 2009 until July 3, 2012, to purchase up to $4,000,000 of principal amount of the Companys 8% notes on the same terms as the original Notes and 40,000 warrants (exercisable in 1,000 blocks) to purchase 128,205 shares of the Companys Common Stock, per 1,000 Warrants, at a per share purchase price equal to 105 % of the closing bid price of the Companys common stock or the exercise price of the Class A Warrants. For each $100,000 of principal of notes purchased pursuant to the Class B Warrants,the Subscribers will surrender 1,000 Class B Warrants.
The Notes cannot be converted to the extent such conversion would cause the Subscriber, together with such holders affiliates, to beneficially own in excess of 4.99% of the of the Companys outstanding common stock immediately following such conversion.
The Company paid the selling agent for this transaction, a cash fee of $100,000 (10% of the aggregate gross proceeds received by the Company) and issued warrants to purchase 256,410 shares of the Companys common stock (20% of the shares issuable to the subscribers upon conversion of the Notes). Fees paid to the selling agent will be amortized over the term of the subscription agreement.
At the Special Meeting of Shareholders held on September 24, 2009, Shareholder approval was obtained for the Companys 2009 Restrictive Stock Incentive Plan.
On September 28, 2009, the Company entered into an Advisory Service Agreement with Garden State Securities Inc. (GSS) to perform certain Advisory and Business services. The Board of Directors has approved the Company to issue 200,000 restricted common shares to GSS.
On October 21, 2009, two holders of the Companys outstanding Convertible Notes dated August 3, 2009 converted principal amounts of $221,256 and interest amounts of $3,855 and were issued a total of 288,605 restricted common shares. On January 29, 2010, two holders of the Companys Convertible Notes dated August 3, 2009 converted additional principal amounts of $489,344 and interest amounts of $19,895.25 and were issued a total of 652,872 restricted common shares. At January 31, 2010 the remaining balance on these debentures amounted to $289,400, net of discount of $313,199.
On November 30, 2009, the Company filed a Preliminary Prospectus, Form S-1, subject to completion. This prospectus relates to the public offering of up to 635,070 shares of common stock, par value $0.01 per share, of Conolog Corporation, by the selling stockholder, which is issuable upon exercise of class A warrants with an exercise price of $1.12. The number of shares being registered is 33% of the shares held by non-affiliates of the company. The Form S-1 went effective as of December 11, 2009.
On December 29, 2009 the Board of Directors voted to reduce the class A warrant exercise price for the 635,070 warrants registered on Form S-1 to $1.00 per Class A Warrant. The balance of the Class A Warrants was reduced to an exercise price of $0.01 per warrant.
During January 2010, the 635,070 class A warrants which were registered and reduced to a $1.00 exercise price were exercised for 635,070 shares of common stock.
8
On February 25, 2010, three investors converted 10,000 Class B Warrants for $1,000,000. Under the terms of the Class B warrants, The Company issued new interest bearing convertible debentures totaling $1,000,000 with interest at 8%. These new debentures can be converted into restricted common shares at the rate of $0.78 per share, but in no event greater than $1.00 per share. Class C Common Stock Purchase Warrants (2,564,102 warrants) were issued with the new secured promissory notes. The exercise price of the Class C Warrants is $1.12. These notes and Class C Warrants contain a provisions where the conversion and exercise price may reset. This provision creates a derivative and is separately accounted for as a liability at fair value. Please see Note 5.
Note 3 Major Customers
The Companys revenues from four customers accounted for $641,867 or 59% of total revenues in the nine months ended April 30, 2010. Each of these four customers accounted for 10% or more of total revenues, which is the definition of a major customer. Accounts receivable from these same four customers at April 30, 2010 amounted to $204,947 of 52% of total accounts receivable.
Note 4 2009 Stock Incentive Plan
In accordance with the Companys 2009 Stock Incentive Plan, on November 20, 2009, 735,000 shares of common stock were issued to officers, employees and directors of the Company at an aggregate market value of $1,381,800 and recorded as stock compensation expense at time of grant. This non-cash expense was recorded in General and Administrative costs on the Condensed Consolidated Statements of Operations.
Note 5 Warrant and Conversion liabilities
Secured promissory notes in the amount of $1,000,000 were issued on August 3, 2009 along with 2,564,102 Class A common stock purchase warrant. These notes and Class A Warrants contain a provisions where the conversion and exercise price may reset. This provision creates a derivative and is separately accounted for as a liability at fair value. At March 6, 2010, $1,000,000 of secured promissory notes and the 2,564,102 Class A common stock purchase warrants have been converted and exercised.
On November 30, 2009 the Company filed a Registration Statement to register 635,070 common stock shares underlying the Class A Warrants. On December 29, 2009 the Board of Directors voted to adjust the exercise price of these 635,070 Class A Warrants from $1.12 to $1.00 and 1,929,032 Class A Warrants from $1.12 to $0.01. 635,070 These Class A Warrants were subsequently exercised at $1.00 per warrant for a total of $635,070. The remaining Class A Warrants ($0.01) were exercised on a Cashless basis for 1,926,265 shares of common stock.
During the 3rd quarter, three investors converted 10,000 Class B Warrants for $1,000,000. Under the terms of the Class B warrants, The Company issued new interest bearing convertible debentures totaling $1,000,000 with interest at 8%. These new debentures can be converted into restricted common shares at the rate of $0.78 per share, but in no event greater than $1.00 per share. Class C Common Stock Purchase Warrants (2,564,102 warrants) were issued with the new secured promissory notes.
The exercise of the Class B Warrants resulted in the issuance of secured promissory notes and the issuance of Class C common stock purchase warrants which are considered derivative equities, The Company has determined these Class B Warrants should also to be recognized as derivative liabilities and separately accounted for at fair value. The Company determined the fair value of the embedded conversion feature and the free-standing class B warrants utilizing a Black-Scholes pricing model. The fair values were measured at the commitment date, at the conversion or exercise date, as applicable, and at the end of the interim period, based on the following range of assumptions: strike price - $0.78 (conversion feature) and $1.00 - $1.12 (warrants); expected life 18 months from commitment date (conversion feature) and 5 years from commitment date (warrants); risk-free rate 2.36% - 2.43%; dividend yield none; volatility 117.4% (conversion feature) and 108.0% (warrants). The total commitment date value of the derivative liabilities of $16,139,959 was recorded with a charge to interest expense of $14,665,698.
9
The secured promissory notes totaling $1,000,000 were issued on February 25, 2010 and March 3, 2010. The notes and the 2,564,102 Class C common stock purchase warrants issued with these notes contain a provision whereby if the Company were to issue common stock prior to the complete conversion or payment of the notes or exercise of the warrants, for a consideration less than the fixed conversion price of the note or exercise price of the warrants, then the conversion price or exercise price would be reduced to such other lower price. The Company has determined that this provision precludes the conversion feature and underlying warrants from being treated as indexed to the Companys own stock, requiring these conversion features and warrants to be recognized as derivative liabilities and separately accounted for at fair value. The Company determined the fair value of the embedded conversion feature and the free-standing warrants utilizing a Black-Scholes pricing model. The fair values were measured at the commitment date, at the conversion or exercise date, as applicable, and at the end of the interim period, based on the following range of assumptions: strike price - $0.78 (conversion feature) and $1.00 - $1.12 (warrants); expected life 18 months from commitment date (conversion feature) and 5 years from commitment date (warrants); risk-free rate 2.36% - 2.43%; dividend yield none; volatility 117.4% (conversion feature) and 108.0% (warrants). The total commitment date value of the derivative liabilities of $5,689,078 was recorded as a debt discount of $1,000,000 and a charge to interest expense of $4,689,079. The debt discount is being amortized over the life of the notes, with the amortizable base adjusted for conversions of debt on a pro rata basis. A total of $355,634 in amortization expense was recognized during the three months ended April 30, 2009 for amortization of the debt discount. Upon partial conversion of debt ($289,400 in principal was converted during the three months ended April 30, 2010), the fair value of the converted shares was determined using the Black-Scholes model on the conversion date and this value ($488,625) was removed from the carrying fair value of the derivative liability. The change in fair value of the derivative liabilities for the three months ended April 30, 2010 of $1,050,200 (income) was measured at April 30, 2010 based on the net change in the commitment date value of the derivative liabilities plus the value of derivative liabilities converted during the period upon conversions of debt. At April 30, 2010, a total of 371,038 common shares were convertible under these convertible notes.
Note 6 - Loss Per Share of Common Stock
Loss per share of common stock is computed by dividing net loss (after dividends on preferred shares) by the weighted average number of shares of Common Stock outstanding during the year. The preferred dividends are not reflected in arriving at the net loss as they are not material and would have no effect on earnings per share available to common shareholders. The effect of assuming the exchange of Series A Preferred Stock and Series B Preferred Stock in 2009 and 2008 would be anti-dilutive.
Note 6 Restatement of Opening Balances Sheets
The Company has restated the Condensed Consolidated Balance Sheets at July 31, 2009 to reflect adjustment made to the Companys financial information, as amended on From 10-K for the fiscal year ended July 31, 2009. At that time the Company did not properly account for the timely amortization of certain costs related to its Stock Grant Plan and the Company has revised the amount of inventory to be reserved in accordance with Generally Accepted Accounting Principles and, as a result, cannot be relied upon.
Note 7 Subsequent Events
On February 25, 2010, the Company received a comment letter from the Securities and Exchange Commission (SEC) regarding the Companys 2009 Form 10-K and October 31, 2009 Form 10-Q. The Company prepared and submitted to the SEC its responses to the comment letter on April 8, 2010. The SEC reviewed the Companys responses and on May 6, 2010 the SEC responded with a follow up comment letter which requested additional information or clarification regarding, among other matters, the level of inventory in relation to sales,
10
measurement and recognition of share based compensation, accounting and measurement of derivative liabilities, and the adequacy of certain disclosures. The Company responded to the SEC in their letter dated June 1, 2010.
Because the financial statements contained in this Form 10-Q do not meet the requirements of Rule 10-01 (d) of Regulation S-X, the Company may not be considered current in our filings under the Securities Exchange Act of 1934. Filing an amendment to this report, when the independent registered public accountants review is complete, would eliminate certain consequences of a deficient filing, but the Company may become ineligible to use Form S-3 to register securities until all required reports under the Securities Exchange Act of 1934 have been timely filed for the 12 months prior to the filing of the registration statement for those securities. The Company is evaluating the impact of filing a deficient Form 10-Q due to lack of a review by an independent registered public accounting firm on its covenants under its contractual commitments, its obligations under NASDAQ Stock Market listing standards, and the Securities Exchange Act.
On June 10, 2010 the Board of Directors amended the provisions of the secured promissory notes, Class B and C Common Stock Purchase Warrants (contained within the August 3, 2009 Subscription Agreement) to (1) set a fixed conversion and exercise price of these promissory notes and warrants at $0.60 and $0.50 respectively and (2) eliminate the reset provision therefore removing the derivative nature of the instrument which would require accounting for a liability at fair value.
On June 8, 2010, a Form 8-K, Item 4.02 Non-reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Period. was filed by the management of Conolog Corporation. Management concluded that its financial statements for the year ended July 31 2009, which are included in its Form 10-K for the year ended July 31, 2009 and the financial statements for three month periods ended October 31, 2009 and January 31, 2010 which are included in its 10-Q for the three months ended October 31, 2009 and January 31, 2010 did not properly account for the timely amortization of certain costs related to its Stock Grant Plan and the Company has revised the amount of inventory to be reserved in accordance with Generally Accepted Accounting Principles and, as a result, cannot be relied upon. The Company has correctly accounted for these costs in subsequent filings with the Securities and Exchange Commission.
On June 18, 2010 Thomas R. Fogg, the Companys Vice-President of Engineering, passed away.
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Contrary to the rules of the Securities and Exchange Commission, the Companys condensed consolidated financial statements included in this filing have not been reviewed by our independent public accountant in accordance with professional standards for conducting such reviews.
Due to the complex development of the derivative calculation required for the Class B Common Stock Purchase Warrants a complete review of this Form 10-Q would not have be completed by the required due date.
When the review is complete, the Company will amend this Form 10-Q.
Results of Operations (three months ended April 30, 2010 compared to the three months ended April 30, 2009.
For the three months ended April 30, 2010 product revenues were $515,897 compared to $293,920 for the three months ended April 30, 2009. The Company attributes this increase to additional customer purchase order releases.
Cost of goods sold (Materials and Labor) increased to $220,403 for the quarter ended April 30, 2010 from $78,159 for the same quarter ended April 30, 2009. This increase in cost can be attributed to the increase in products produced and shipped within the quarter and by an increase in fixed labor costs.
Gross profit for the three month periods ended April 30, 2010 and 2009, amounted to $295,494 or 57% of revenues and $215,761 or 73% of revenues respectively.
11
Total Selling, general and administrative expenses decreased to $849,894 for the three months ended April 30, 2010 compared to $1,152,063 for the three months ended April 30, 2009. This decrease for the three month period was primarily due to a non-cash expense of $1,381,800 for the annual stock incentive grant to employees, officers and directors which was amortized in an earlier period.
Other non-cash non-operating income (expenses) increased to $8,581,657 for the three months ended April 30, 2010 compared to ($184,759) for the three months ended April 30, 2009. This increase consisted primarily of changes in fair market value of derivatives of $13,965,643 offset by related interest expense ($4,946,564) related to recording of equity derivatives on debt.
As a result of the foregoing, the Company reported net income from operations for the three months ended April 30, 2010 of $8,027,257, or $1.22 earnings per share- Basic and $0.47 earnings per share- Diluted, compared to a net loss from operations of ($1,121,061), or ($1.19) (loss) per share Basic and diluted, for the three months ended April 30, 2009.
Basic earnings per share is computed based on the weighted average number of common shares outstanding, including potential common shares outstanding for conversion and exercise of secured promissory notes and warrants to purchase common stock, which are recognized as derivative liabilities and separately accounted for at fair value for each reporting period.
The Company determined the fair value of the embedded conversion feature and the free-standing warrants utilizing a Black-Scholes pricing model. The fair values were measured at the commitment date, at the conversion or exercise date, as applicable, and at the end of the interim period, based on the following range of assumptions: strike price - $0.78 (conversion feature) and $1.00 - $1.12 (warrants); expected life 18 months from commitment date (conversion feature) and 5 years from commitment date (warrants); risk-free rate 2.36% - 2.43%; dividend yield none; volatility 117.4% (conversion feature) and 108.0% (warrants).
Results of Operations (nine months ended April 30, 2010 compared to the nine months ended April 30, 2009.
For the nine months ended April 30, 2010 product revenues were $1,095,913 compared to $1,239,560 for the nine months ended April 30, 2009. The Company attributes this decrease to the scheduling in receiving customer purchase order releases. The Company believes that this scheduling of releases will adjust in the following quarter.
Cost of goods sold (Materials and Labor) increased to $514,394 for the nine months ended April 30, 2010 from $312,522 for the same nine months period ended April 30, 2009. The Company attributes this increase in cost of $201,872 to production of more costly systems combined with an increase in fixed labor costs.
Gross profit for the nine month periods ended April 30, 2010 and 2009, amounted to $581,519 or 53% of revenues and $927,038 or 75% of revenues respectively.
Total Selling, general and administrative expenses increased to $3,434,412 for the nine months ended April 30, 2010 compared to $2,285,610 for the nine months ended April 30, 2009.This increase of $1,148,802 was primarily due to the amortization of a non-cash expense of $1,381,800 for the annual stock incentive grant to employees, officers and directors in an earlier period.
Other non-cash non-operating expenses increased to $25,644,348 for the nine months ended April 30, 2010 compared to $428,413 for the nine months ended April 30, 2009. This increase in expenses consisted primarily of negative change in fair market value of derivatives of ($2,102,682) and the increase in interest expense ($23,678,829) related to recording of equity derivatives on debt.
As a result of the foregoing, the Company reported a net loss from operations for the nine months ended April 30, 2010 of ($28,500,376), or ($7.24) (loss) per share Basic and Diluted, compared to a net loss of ($1,786,985), or ($2.46) (loss) per share for the nine months ended April 30, 2009.
Basic earnings per share is computed based on the weighted average number of common shares outstanding, including potential common shares outstanding for conversion and exercise of secured promissory notes and warrants to purchase common stock, which are recognized as derivative liabilities and separately accounted for at fair value for each reporting period.
12
The Company determined the fair value of the embedded conversion feature and the free-standing warrants utilizing a Black-Scholes pricing model. The fair values were measured at the commitment date, at the conversion or exercise date, as applicable, and at the end of the interim period, based on specific assumptions for each reporting period including: strike price (conversion feature and warrants); expected life 18 months from commitment date (conversion feature) and 5 years from commitment date (warrants); risk-free rate; dividend yield none; and volatility.
LIQUIDITY AND FINANCIAL CONDITION
Inventories from the Companys product segment increased from $850,920 at July 31, 2009 to $1,247,721 for the nine months ended April 30, 2010, an increase of $188,455. The Company classifies ( in accordance with GAAP) as current assets only that amount of inventory it expects to realize in the next 1 year operating cycle, the balance of the inventory is classified as non-current Accounts Receivable-trade increased to $396,118 for the nine months ended April 30, 2010 from $245,980 as of July 31, 2009.
Cash expenditures have exceeded revenues for the prior year and Management expects this consumption of cash to continue into next year. Our operations have been and will continue to be funded from existing cash balances and private placements of equity. The Company also anticipates additional financing during the next12 months of up to $3,000,000 from current investors.
FORWARD LOOKING STATEMENTS
This quarterly
report contains certain forward-looking statements within the meaning of
Section 27A of The Securities Act of 1933, as amended and section 21E of The
Securities Act of 1934, as amended. Such Statements are subject to certain
risks and uncertainties, including, among other things, significant variations
in recognizing revenue due to customer-caused delays, and intense competition
from more well known companies, that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above, among other
factors, could affect the Companys financial performance and could cause the
Companys actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements. The Company does not undertake, and specifically declines any
obligations, to publicly release the results of any revisions, which may be
made to any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of unanticipated
events.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A
ITEM 4T CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
It is managements responsibility to establish and maintain adequate internal control over all financial reporting pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the Exchange Act). Our management, including our principal executive officer and our principal financial officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of the filing date of Form 10-Q Quarterly Report. Based upon their evaluation as of April 31, 2010, the end of the period covered by this 10-Q report, the Companys chief executive officer and chief financial officer concluded that, the Companys disclosure controls and procedures are not effective to ensure that information required to be included in the Companys periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.
The significant deficiency consisted primarily of inadequate staffing and supervision that could lead to the untimely identification and resolution of accounting and disclosure matters and failure to perform timely effective reviews.
13
Additionally, due to the Companys poor expertise in applying the FASB Codification guidance in regard to interpreting the requirement for a derivative liability; the error in the presentation of employee stock-based compensation and an error in calculating earnings per share, it has engaged outside expects to advise management on all required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10Q that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings A Promissory Note dated October 22, 2002 from Natony Corp. and Independent Computer Maintenance, LLC to Conolog Corporation came into default during November 2009. The Company has filed for a judgment seeking full payment and penalty against the makers.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: During the quarter ended April 30, 2010, a Note Holders exercised conversion rights to convert $289,400 principal and $13,217 of interest to 387,971 unregistered shares of common stock. In connection with the foregoing, the Company relied upon the exemption from securities registration afforded by Rule 506 of Regulation D as promulgated by the SEC under the Securities Act of 1933, as amended (the Securities Act) an/or Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, and transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933.
Item 3. Defaults upon Senior Securities None
ITEM 4 Removed and Reserved
ITEM 5. Other Information None
ITEM 6 .Exhibits
|
|
|
Exhibit Number |
|
Description |
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act |
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act |
32 |
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act. |
14
|
|
|
CONOLOG CORPORATION |
|
|
Date: June 21, 2010 |
By /s/ Robert S. Benou |
|
|
|
Robert S. Benou |
|
Chairman, Chief Executive Officer, |
|
(Principal Executive Officer) |
|
Chief Financial Officer and Treasurer, |
|
(Chief Accounting Officer) |
15